Client Alert: Administration’s Attempt to Freeze all Federal Financial Assistance is Stalled by Court Ruling
What Contractors/Grantees Should Do Now
Date: February 5, 2024
On January 31, 2025, a Federal judge in Rhode Island issued a Temporary Restraining Order (TRO), barring the Administration from freezing spending on federal grant and aid programs, calling the move unlawful and adding that the issue was not mooted by a January 29th White House memo claiming the directive had been rescinded.
The TRO effectively, and at least temporarily, puts the skids on the January 27, 2025 OMB Memorandum. The Court ruled that the plaintiffs are likely to succeed on their claims that the Executive’s actions violate the Constitution and statutes of the United States. In response, and needing to act “under the ‘worst case scenario’ because the breadth and ambiguity of the Executive’s action make it impossible to do otherwise [,]” the Judge issued a TRO that blocked the federal funding freeze.
The Court further stated that: “During the pendency of the Temporary Restraining Order, Defendants shall not pause, freeze, impede, block, cancel, or terminate Defendants’ compliance with awards and obligations to provide federal financial assistance to the States, and Defendants shall not impede the States’ access to such awards and obligations, except on the basis of the applicable authorizing statutes, regulations, and terms.”
In addition, the Court explained that “Defendants shall also be restrained and prohibited from reissuing, adopting, implementing, or otherwise giving effect to the OMB Directive under any other name or title or through any other Defendants (or agency supervised, administered, or controlled by any Defendant), such as the continued implementation identified by the White House Press Secretary’s statement of January 29, 2025.”
Finally, even if the Administration chooses to stop funding a contract or grant for reasons outside the OMB Directive, it must “comply with all notice and procedural requirements in the award, agreement, or other instrument relating to decisions to stop, delay, or otherwise withhold federal financial assistance programs.”
A TRO usually lasts for 10 days. In this case, however, it will last until “further Order of the Court.” Presumably, the Court will decide after another hearing on whether to grant a Preliminary Injunction, which would last until a full trial of the matter which ordinarily takes a while. Because of the importance of the case, however, a trial could be moved up sooner. If the plaintiffs succeed at trial, the Court will issue an Order granting a Permanent Injunction. Such an Order would put a permanent stop to the Administration’s funding freeze and maybe parts of its related Executive Orders. However, such an Order would almost certainly be appealed and would most likely end up before the U.S. Supreme Court, where anything could happen.
What Federal Contractors/Grantees Should Do Now
In the meantime, Federal contractors/grantees should not panic. Rather, they should take at least some of the following precautionary actions, which, hopefully, they will never have to use. First, they should study their contracts, awards, and agreements and make sure that they are fully familiar with the clauses and provisions that can be invoked, outside of the OMB Directive, that can be used by their agency to stop, delay, or withhold federal financial assistance from them. Most importantly, they should be aware of all of the notice and procedural requirements in the agreement that the Federal agency must follow.
For example, if the contractor or grantee is terminated for convenience or is issued a stop work order, the applicable provision in the agreement usually informs the contractor or grantee as to what costs they can recover in such situations. In addition, the contractor/grantee should stay in close contact with their contracting officers or their grant officers in order to be prepared for any unexpected procedural contract action from the Government in which the contractor/grantee may be negatively impacted. Also, Federal contractors/grantees should review their subcontracts to make sure that their subcontractors are not in a better position than they are should a termination for convenience or stop work order occur.
Needless to say, if the contractor/grantee has any current outstanding issues with the Federal agency in which they have an agreement, they should work to resolve them as soon as possible. Such outstanding issues might include obtaining approval for deliverables under the contract or grant, payment of invoices that might be past due, and the issuance of pending contract/grant modifications.
Furthermore, contractors/grantees should expand their accounting systems to make sure that they can document costs and expenses for the winding down of the contract/grant, including labor costs and attorney fees. These costs are usually allowable in a termination for convenience settlement. Moreover, contractors/grantees should save and memorialize all contacts with agency contracting officials, if they are not already doing so. Also, they should keep their employees and subcontractors in the loop by keeping them updated as to the latest court decisions and orders, as provided to them by their attorneys. This can help with employee retention and stability by immediately separating rumors from facts.
Finally, in light of the fact that the TRO judge ruled that the Administration’s attorneys must provide written notice of its Order to all Defendants, Federal agencies, and their employees, contractors, and grantees by Monday, February 3, 2025, at 9 a.m., the contractors/grantees should make sure that they have received such a notice. If they haven’t, this firm can provide them with a copy of the Order.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.